Johan Van Overtveldt--A Crucial Week

Since early November, Johan Van Overtveldt, author of the new book The End of the Euro, has been blogging here about the eurozone crisis.

This week is of the utmost importance to the euro’s future. European heads of state, led by German chancellor Angela Merkel and, to a lesser extent, French president Nicolas Sarkozy, are searching for a formula to restore confidence in the European monetary union and ensure the euro’s survival. At the upcoming European summit on December 8–9, they need to reach some convincing conclusions in order to prevent financial markets from launching a final assault on the euro.

As things stands now, it’s possible a deal will be hammered out that includes important steps toward forging a fuller political union, with more binding rules regarding fiscal deficits and fines for offenders. This deal should be enough for the European Central Bank (ECB) to step up its bond-market interventions aimed at guaranteeing the needed financing for troubled countries like Italy and Spain (while similar troubles loom for France and Belgium), and also to keep the cost of this financing at moderate levels. While these ECB interventions calm the markets, it is hoped, the politicians can work out their grand bargain on further political integration.

Whether this strategy can succeed depends almost entirely on the specific content and credibility of the deal to be negotiated in the coming days. The European leaders start with a huge handicap: the incompetence and negligence with which they tried to manage the crisis so far means that they will have to overcome a lot of a priori doubt. If the compromise is insufficiently firm on the transfer of powers to the European level, and on the automatic interventions affecting members that break the rules, the euro and the monetary union will soon be back under severe attack.

What is fundamentally at stake here is whether all members of the eurozone are prepared to give up substantial parts of their national sovereignty in economic, financial, and social issues. For several countries, such a decision remains hugely difficult. This is foremost the case in France, where next May will see new presidential elections. President Sarkozy’s major opponent will be the socialist Francois Hollande, who in recent weeks repeatedly claimed that he would not surrender one inch regarding French sovereignty. Opinion polls show this message to be resonating with French voters. That is an enormous problem for the feature of the euro.